Govt opens consultation on defined benefit pension 'superfunds'

The UK government has launched a consultation on allowing defined benefit (DB) pension schemes to consolidate into 'superfund' entities.

It's thought that larger, combined schemes would benefit from improved funding, economies of scale and better governance -- offering more security for members.

According to the Department for Work and Pensions, advantages of superfund schemes are that they:

• Protect savers through a capital buffer, providing greater security by reducing the risks associated with future employer insolvencies;
• Provide an alternative way for employers in certain circumstances to separate themselves from legacy pension arrangements by moving closed pension schemes into a superfund, freeing them to focus on the day-to-day running of their business;
• Improve the likelihood of members' benefits being paid in full; and
• Enable access to a wider and potentially more innovative mix of investment opportunities.

The consultation seeks views on a new legislative framework for authorising and regulating defined benefit superfund consolidation schemes.

Until that authorisation framework is put in place, DB superfunds seeking to enter the market must discuss their plans with The Pensions Regulator (TPR) before opening for business. In new guidance published last week, TPR set out its expectations of DB superfunds and said it will scrutinise all superfunds entering the market to ensure any risks are identified, assessed and mitigated.

Welcoming the consultation, Joe Dabrowski, head of DB, Local Government Pension Scheme (LGPS) and Standards at the Pensions and Lifetime Savings Association (PLSA), said: "Over 11 million savers across the UK are still reliant on DB schemes for their retirement income but -- despite employers making over £400bn of contributions over the last 10 years -- the vast majority of schemes remain in deficit. Allowing DB schemes the choice to consolidate and enter a superfund will provide a much needed new option for many schemes, and especially those with weaker employer covenants."

The consultation is open until 1 February 2019.